Singapore, Asia markets slide after Fed signals more rate hikes and peak at higher level

SINGAPORE – Asian markets followed Wall Street southwards after Federal Reserve chairman Jerome Powell dashed hopes of an immediate pivot on the US central bank’s aggressive monetary policy.

In Singapore, the Straits Times Index (STI), which had recently regained its foothold above the key 3,000 support level, kicked off 34 points or 1 per cent lower at 3,106 points.

By 10.10am, the STI was down 1.54 per cent, with even banks, which usually benefit from rising interest rates, taking a beating. Shares of DBS, which on Thursday morning posted a 32 per cent jump in third-quarter earnings, were down 2.1 per cent at $34.01. OCBC fell 1.4 per cent to $11.89, while UOB dropped 0.9 per cent to $27.83.

Australia’s S&P ASX Index tumbled 1.9 per cent, while South Korea’s Kospi fell 0.7 per cent. In Hong Kong, whose currency is pegged to the United States dollar, the Hang Seng Index sank 2.4 per cent. China’s Shanghai Composite was down 0.3 per cent.

Markets in Japan were closed for a public holiday, but futures were trading around 350 points below Wednesday’s close..

Overnight on Wall Street, the Dow Jones initially rose, then fell to end the session with a 505.44-point or 1.55 per cent loss at 32,147.76 points as the news sunk in. The S&P500 fell 96.41 points or 2.5 per cent to 3,759.69 points. The Dow had gained 13 points over the past month, boosted by better-than-expected earnings and hopes of a Fed pivot.

Announcing an increase of 75 basis points (bps) in its key lending rate on Wednesday – the Fed’s fourth consecutive rate hike – Mr Powell dismissed the idea that the central bank may be pausing its rate hikes soon.

“It is very premature to be thinking about pausing,” he said. “People, when they hear ‘lags’, think about a pause. It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go.”

And while the Fed chair signalled that future increases in borrowing costs could be made in smaller steps to account for its front-loading of rate hikes, he warned that rates could well end up being higher than policymakers had estimated at their last meeting in September.

He also conceded that the path towards a soft recessionary landing for the US economy was “narrowing”.

OCBC Bank chief economist Selena Ling noted that market speculation had been too hopeful for a dovish policy pivot to an earlier pause or even a rate cut. But she added that future rate hikes could be smaller.

“The Fed’s message was very clear – front-loading of aggressive rate hikes is done, so a taper to 50 bps for the December FOMC is likely,” she said, using the acronym for the Federal Open Market Committee.

Indeed, while hiking by 75 bps this week, Mr Powell hinted that the time to reassess the pace of increases “is coming”, signalling that future rate increases in borrowing costs could be smaller.

Whatever the case, the Fed’s latest action and Mr Powell’s words have cooled down some of the optimism that has lifted markets in recent weeks.

UOB economist Alvin Liew noted that Mr Powell had made clear that the Fed was not easing up on rates any time soon, and the ultimate level, or terminal rate, when the current tightening round ends would be higher than previously expected.

“So we are now inclined to lift the terminal rate above our current 4.5-4.75 per cent,” he said.

“But the part I am most conflicted about is the Fed pivot. Powell did say it would be appropriate to slow the pace of increase ‘as soon as the next meeting or the one after that’. So I am inclined to stick to our call for a 50 bps hike in December and either raise the number of hikes or the magnitude of hikes in the first quarter of 2023.”

Still, brokers noted that the market had not reacted as negatively as one might expect, largely due to the somewhat mixed message – that while a pivot was not imminent, future rate hikes could be smaller. All eyes are now on whether the Fed will moderate its policy at its December meeting.

The latest rate hike has lifted the Fed’s short-term target range of 3.75 per cent to 4 per cent, the highest level since January 2008. The futures market is anticipating a terminal rate to peak at between 5 per cent and 5.5 per cent by May 2023.